‘Are we at the digital tipping point for payments yet?’: Deloitte’s Zachary Aron
- Between a global pandemic, threat of a recession, and the move to RTP, the payments industry has faced a lot of change.
- Zach Aron, who runs the payments practice globally for Deloitte, joins us on the Tearsheet Podcast to discuss a broad range of payments topics.
My guest today is Zachary Aron. At Deloitte, Zach heads the payments practice globally and co-leads the US. We spend quite a bit of time trying to understand the move towards payments modernization.
Of course, the current economic challenges influence how Deloitte’s clients are thinking about things like RTP and ISO20022 – Zach sees some FIs taking advantage of the opportunities to streamline payments operations and products with an eye on future competitiveness. Zach also shares why he thinks payroll is one of the first use cases of real-time payments.
I first met Zach at Money 2020 last year, and this episode is a continuation of the conversation that was started in Las Vegas. Zachary Aron is my guest today on the Tearsheet Podcast.
The following excerpts were edited for clarity.
Zach Aron, Deloitte: I lead the payments practice globally, co-lead in the US. For Deloitte, we have about 1800 professionals who provide services across the payments ecosystem. So that's everywhere from traditional financial institutions in the payment space, payment intermediaries like networks or central banks that help manage the business manage payments, as well as non banks as well, whether that's fintechs, retail companies, health care, state government agencies, – where payments is an important part of their business.
It's definitely going to be an interesting year in our mind, where we're going to see two interesting forces collide against each other: one being continued progress around modernization of payments and the other which is really the macroeconomic environment. And what does that mean, regarding, for instance, consumer spending? What does that mean, relevant to the issuance and the management of credit? And fundamentally, how is that impacting levels of investment and types of risk and strategies that people want to take on.
Modernization of payments
We believe that we're in the middle of a fundamental remaking of what it means to be in payments. And, so when we think about modernization, we really see it in a couple of ways. One is the monetization of infrastructure. We think about the rails which are used to process payments. We see that in the move to the new ISO 20022 standard – some of that is driven by mandates from Swift, but we see all of our financial institution clients looking at a path towards moving a lot of their payment flows to the ISO standard and using that to manage the business, especially when you think about the potential for using the data that gets involved in the message.
Additionally, we see that in the rollout of real time payment networks – we have a couple in the US. Outside the US, certain markets have already fully moved to that. But we're starting to see further adoption trials rollout of really new rails, whether those are real time rails, whether those are things like regulated liability network trials that we see occurring, etc.
I think the third piece around modernization we see is experiments around Central Bank Digital Currencies. And what that means all with an eye around making payments easier to do, enabling more innovation to occur around the transactions or events that require payments, and being and creating a more inclusive market for everyone – individuals and businesses – that have better ability to gain and receive and move money in order to be able to live their lives or run their businesses the way that they need to.
We don't think it's a ‘Y2K moment’ where people looked up and said, “Are we going to be in trouble?” But rather, technology advancements have enabled the ability to do more. It's enabled the ability for us to look at how we take friction out – whether that's using automation or things like better integration through APIs to bring unique technologies, where you can take certain platforms, move to the cloud and gain increased scalability and speed. How can we now take advantage of them and make payments easier? And by making it easier, that enables greater ability for people to send and receive money. And again, improve the ability to innovate around that, and to bring better experiences, or better make people able to do things that they want to do easier.
We see all of the financial institutions that we serve being really aggressive and being really thoughtful about how to support this. That means investment. And so we see investment, we see effort and awareness around what needs to be done. I think they see what their retail customers want, but they’re also hearing what their businesses want, as well.
When you think about some of the public announcements about partnerships that are being brought out, the trials around expanding real time payments and access around that, I think you see a lot of effort being made to say, how do we create improved customer experiences? How do we create better access? How do we also view collaboration, so that we can actually bring those experiences more quickly to customers?
Early RTP use cases
One that's already been taking place has been payroll, as an example. We think a lot about gig workers or folks that getting access to a traditional paycheck every two weeks or once a month is not a good way for them to be able to manage their own lives. It actually puts them at a disadvantage. And now we're seeing the ability for a lot of these platforms that rely on gig workers, everything from food delivery and services, enabling folks to get paid when they want to get paid, even on an everyday basis, if that's what enables them to be able to use money faster.
Can banks really transform digitally?
I think we are at the digital tipping point, and there's a whole journey that digital takes where it moves from a feature to a channel, to actually something that is embedded in how things work on a regular basis. And it almost becomes the point where you don't really say digital anymore, because it's expected and nearing towards that. And part of that process is actually really understanding the totality of the business model and the operating model and how you do it.
We see that playing out in a variety of ways. When we looked at previous evolutions or things that have found their way into practice there's sometimes a period where you move from one stage, as things evolve, you have to think about how you evolve the overall model around it. What we've seen are people figuring out things around, well, how do I adjust my risk model? How do I adjust how I handle the totality of operations and servicing? Some of this is a natural evolution around this.
We certainly see a lot of other areas that have had a big upswing, and now you start to see a sort of recalibration and re-measuring. But what they don't do is go away. It's about learning. And it's about how you take this and figure out how to fine tune the model and figure out what actually does work. And then, how you strengthen everything that you do from front, middle to back office to support that.
Digital at its core
With real time payments, we say it's not an if, it's a when, as an example. If you think about what some of these things are teaching us in terms of being digital first, or even thinking about things like buy now, pay later, what underneath what you're building is the enduring asset. Buy now, pay later gets a lot of press around risk models and exposure. But what it also has taught us is customers do want real time issuance, and they do want the ability to personalize how they pay for something based on the transaction amount. It needs to evolve further into how to provide customers the best advice about when, where, why and how to use it.
It then reminds you to think about how to help coach your customer to think about responsible usage and things like that. And then, also, how you enable the right merchant experience, as well. So when we think about all these things for our clients, we start with the point that it’s a long arc. It's really about understanding and improving your underlying capabilities, so that you understand again, in the end, it's not just about how I issue a product, but how I manage it post issuance. It's about how I educate my customers and how I modify and enhance the way I service things overall. It’s about taking that overall view and building the capabilities around it – you can then figure out the right way to present and manage that product and experience to your customers.
Central Bank Digital Currencies
We're seeing a lot of trials where people are saying the problem to be solved is partly a friction problem and partly an inclusion problem. And asking if this is going to enable payments to be made easier. Will it be easier for people to manage or for institutions to manage transactions more easily? And is it going to enable greater inclusion? As those questions get answered, you'll start to move to it's not if, it's when.
I think we're probably not there yet, but when we see the various trials that are being done by various economies, you're seeing the learnings and you're seeing those underlying things that come through that say, this is really the enduring asset and feature that needs to be built upon that.
With some of the trials that are being executed this year, I think we're going to start to see if it starts to answer the question. I think we'll probably get a little bit clarity on that this year,
Blockchain isn’t just crypto
One thing we've always said is you have to separate the speculative aspect from the infrastructure. When we think about it, and separate the two, the level of focus in cooperation is pretty significant. Does it improve inclusion? Does it make moving money easier overall? I think you see a focus on answering those questions by the folks that really are in the business of payments – that is separate from a lot of the news that generally comes out on the topic.
A lot of ways we assist our clients, especially in the US, it's well, let's talk about what's happened in the UK. Let's talk a lot about Australia, as an example. You see a lot of wanting to learn what others have done. And everyone understands that this context is different and is unique. But they do want to understand, well, what are some of the learnings? What are the things that we can expect? How do we not necessarily repeat certain things?
Cooperation and interoperability
The other thing I think that is encouraging is you see a lot of cooperation. There are trials right now between the US and Europe, one that's being led, for instance, by The Clearing House. You see trials occurring out of Singapore through MHS, with a variety of economies, that are all about interoperability. We think that is actually another big theme for this year: the level of cooperation and the ability to understand interoperability between some of these networks and some of these trials, is, in our mind, going to be a really encouraging development that comes out this year.
Impact of macro economy
A lot of our clients have lived through cycles. There are a lot of elements around thinking through things, like around managing overall risk in terms of extension of credit and things like that. Obviously, macro conditions can sometimes slow down the rate of innovation. And so there's a little bit more of a focus on progressing, while making sure that everything can be done in measurable steps. You focus on the efforts that you want to make.
The interesting part we also see is a lot of our clients are also thinking about this from an opportunity perspective. I see that in two examples. One is digital. And one of the examples around this is, can we use this to become continuously more efficient, in terms of how we do everything from product presentment to product management, servicing and operations? We see some of this in terms of thinking about payments on an enterprise level, not just on a product level, especially in how you manage some of the operational aspects of it.
The other example is relative to the workforce. We're starting to see a lot of our clients take a look at this and say, this is a great time for us to think about how we train our folks in taking advantage of new technologies. Is this an example of how we can also think more innovatively about how our people are going to create and support new products and services in the payment space? We've certainly seen that, from time to time, our clients were really thinking that this is also the time to double down on the work experience and how our people support what needs to be accomplished in payments.